The European Court has delivered another judgment regarding the value-added tax on unpaid consideration
C‑314/22. – „Consortium Remi Group” AD | The European Court has delivered another judgment regarding the value-added tax on unpaid consideration
The plaintiff in the underlying case is a Bulgarian construction company whose tax number was canceled in 2019, and in 2020, it went into liquidation. Previously, between 2006 and 2010, as well as in 2012, the plaintiff company invoiced product sales and services to customers who did not settle the invoices.
During a tax audit, the Bulgarian tax authority revealed that the plaintiff did not pay the value-added tax (VAT) on the unpaid consideration, resulting in a tax shortfall. The decision of the tax audit, became final and the plaintiff paid the tax debt. However, later on, the plaintiff submitted a VAT refund claim, arguing that the VAT on the unpaid consideration was levied and paid without legal basis, and it sought interest against the tax authority starting from the first day of the month following the invoice issuance. To support the claim, the plaintiff was able to demonstrate that its claims against non-paying customers had been recognized as valid claims in the ongoing liquidation proceedings of the customers. Nevertheless, the tax authority denied the VAT refund.
Firstly, it argued that the plaintiff submitted the claim after the statutory time limit prescribed by Bulgarian law (i.e., more than five years from the year following the occurrence of the factual situation serving as the basis for the refund). Secondly, it determined that the plaintiff did not modify the invoice or notify the non-paying customer about the intention to reduce the VAT base, thus failing to prove that the VAT was incorrectly charged without legal basis.
The European Court interpreted the rules of the VAT Directive related to retrospective reduction of the tax base concerning unpaid consideration, as well as the taxpayer’s right to interest, in light of the principles of tax neutrality, proportionality, and effectiveness. The court confirmed that if the internal law of a member state explicitly does not provide for the possibility of retrospective reduction of the payable VAT in the case of non-payment by the customer, it should be considered that the member state has exercised its right to deviate from the main rule (that non-payment by the customer is a valid reason for retrospective reduction of the tax base). However, the court stressed that taxable persons may not be deprived of the reduction of the taxable amount for VAT purposes in the event of definitive non-payment. The European Court also affirmed that it does not conflict with community law if member states tie the refund of VAT on unpaid consideration to a statutory time limit.
However, this deadline cannot start earlier than when a diligent taxpayer could practice the right to a refund, and the deadline must be reasonably identifiable. At the same time, according to the court, the Bulgarian tax authority’s practice, which unconditionally requires invoice correction and customer notification for VAT refund – conditions that cannot be met when the issuer’s tax number has been canceled and the customer is already in liquidation – violates the principles of tax neutrality and proportionality. In case of delayed disbursement of a legitimate VAT refund, the taxpayer is entitled to interest, but in the absence of state regulations, interest is only calculated from the time when the taxpayer applied for the VAT refund.
